Assume that Herb’s business in the preceding problem case has been operating for

Question

Assume that Herb’s business in the preceding problem case has been operating for a year and has made a profit. Herb has expanded by purchasing other leather products to sell. All the profit has been reinvested in the business. Herb has, however, paid off $2,000 of the loan to the bank. The bank is willing to renew the loan and even to increase it to $10,000 if Herb’s father cosigns again. Bill Williams would like to join the firm full time but has no money or credit to contribute. Herb and Bill think that if they had a salesman to visit men’s clothing shops and perhaps other retailers, they could increase their sales substantially. A mutual friend, George Robbins, has had sales experience and would be willing to join the business. He could invest $10,000. The workshop in the back of the shop is already too small. Herb would like to rent a loft or other low-rent space for belt production where there would be no interruptions and enough space for several workers. Herb would also like to have Bill supervise this operation. Herb estimates that minimum capital of $40,000 is necessary. What he owns in equipment, supplies, and inventory is worth $10,000 at cost, and he believes that the value of his going business is at least $10,000 in addition. His father is willing to invest $5,000 but wants no further liability. Uncle Joe is also willing to invest $5,000 on the same basis.

What form of business organization is appropriate?

Why is that form of business appropriate and what are the alternatives?

How should it be capitalized?

Explanation / Answer

1. In the given case, business of Herb is in the initial year and is on a very small scale, moreover for expanding the business, Herb needs additonal capital from investors and also wants new investors. However father and uncle of Herb is agreeing to invest with no further assumption of liabilities in business. Also Bill williams has no money to invest in but want to join the business. IN such case, Limited liability partnership firm will be most appropriate business organization as the same will help Herb in accepting the money from investors with limiting their liability to certain extent. Moreover, LLC has the benefit of tax pass through to it's partners. This means that partnership is taxed on the personal return of partners with lower personal tax rate. As in the initial years, Herb also wants to save tax, LLC will help in achieving the same.

2. Apart from LLC, Herb can also elect to form S Corporation. It is a kind of company in which income is taxed on the personal return of the stockholder's and is not taxed on corporate tax rate. However, such kind of business organization has it's own disadvantages.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.